The FCPA Blog | By: Richard Bistrong | October 03, 2017:
Alere Inc. paid more than $13 million last week to settle SEC charges of accounting fraud and overseas bribery. Embedded in the details are some very meaningful lessons for compliance leaders, and even more importantly, for business leaders. Those real-world lessons are about the accounting fraud.
The SEC’s release said Alere “improperly inflated revenues by prematurely recording sales for products that were still being stored at warehouses or otherwise not yet delivered to the customers,” adding that Alere also “engaged in improper revenue recognition practices at several other subsidiaries.”
That type of accounting fraud goes by many other names, but the one I have heard the most is “channel stuffing.”
I am quite familiar with this accounting maneuver, and proffered to the SEC about it in 2007. It often starts when quarter-end time approaches, where forecasts are short of plan, and the call to make your numbers leads to all sorts of solutions, of which channel stuffing is an oft deployed response.
Most of the time channel stuffing involves the transfer of title, and hence the recognition of revenue, where title has been financially (or legally) transferred but the goods themselves haven’t moved to the client.
In Alere’s case, as well in my own experience, goods were shipped to a warehouse, where the client was then invoiced but didn’t accept the product into their own facility (or drop-ship onwards). Hence, title and ownership weren’t actually transferred.
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